Action
　　We downgrade Sunac Services (1516.HK) from OUTPERFORM to NEUTRAL.
　　What’s changed?
　　Posts loss in 1H22. Sunac Services’ 1H22 attributable net profit was -Rmb751mn in 1H22, well below market expectation due to an Rmb1.83bn impairment provision for trade receivables from the parent company Sunac China (the end-1H22 outstanding trade receivable from connected parties was Rmb3.65bn). In addition, the parent company’s difficulties in proceeds collection also weighed on Sunac’s cash flow, and the firm’s book cash declined by about Rmb1.38bn HoH as of end-1H22. We think risks of account receivable impairment and cash flow decline will persist in the next 6-12 months.
　　Scale growth to decelerate. The firm booked a net addition of 19.7mn sqm managed GFA in 1H22 (with about 11mn sqm delivery from the parent company), taking the total to 234mn sqm. It also booked a net addition of 18mn sqm contracted GFA to 376mn sqm. We see uncertainty in the parent company’s project completion and delivery (corporate guidance at about 30mn sqm in 2H22). What’s more, the firm’s annual new contracted GFA from third-party projects is about 40-50mn sqm. We thus estimate Sunac’s average annual growth of managed GFA may decelerate to about 15%.
　　Likely to digest impact of business structure adjustment in next 1-2 years. The firm’s revenue from value added service (VAS) to non-property owners fell 19% YoY in 1H22 with gross margin down 12ppt YoY to 26.3%. We foresee uncertainty in the parent company’s new-home sales, while the firm chose to reduce its fees for sales assistance services and consulting services in 1H22 and exited several sales assistance projects. Therefore, we expect downward pressure in the revenue and profit of VAS to non-property owners in the next 1-2 years. Amid an adjustment to business structure, we forecast sharp fluctuations in Sunac’s overall earnings.
　　How do we differ from the market? We think fluctuations in Sunac’s financial performance and operations related to the adjustment of its business structure may be worse than the market expects.
　　Potential catalysts: Significant impairment for trade receivables from connected parties in 2H22.
　　Financials and valuation
　　Considering impairment risk for connected-party account receivables and sharp profit declines in real estate associated businesses, we revise our 2022 forecast attributable net profit from Rmb1.63bn to -Rmb1.00bn, and lower our 2023 forecast 51% to Rmb987mn. We downgrade Sunac Services to NEUTRAL and cut our target price 63% to HK$2.30 (6x 2023e P/E with 9% downside), considering earnings forecast revisions and increased uncertainties in future operations. The stock is trading at 6.7x 2023e P/E.
　　Risks
　　Better than expected connected-party account receivables collection and account receivables impairment in 2H22; better-than-expected development of main businesses such as basic property management and community VAS in 2H22 and 2023.